Private Equity Ignites Small Business Growth and Hiring, Research Confirms

The source of a business's funding can make a big difference in that company's success, new research shows.

A study by the Institute for Exceptional Growth Companies (IEGC) and Pepperdine University found that both private-equity and venture-capital financing dramatically accelerate the sales and job growth of small and medium-sized U.S. businesses.

"The magnitude of revenue and job growth for private-capital backed companies was surprising," said study co-author John Paglia, a Pepperdine associate professor of finance. "We expected it to be positive, especially at the lower end of the marketplace, but we didn’t realize how large it would be."

Paglia, along with co-author Agus Harjoto, studied the performance of nearly 8,700 different businesses that had fewer than 500 employees and received private capital financing between 1995 and 2009.

The researchers discovered that, during the five years following a financing event, the 6,815 establishments that received private equity had a $7 million greater increase in revenue than a control group. That group consisted of non-backed establishments of similar size and characteristics. The equity-backed businesses also created 36 more new jobs than did the control group.

The study showed even more dramatic results for the recipients of venture capital. During the five years after the businesses received such financing, they saw a $24.7 million greater increase in revenue and created 127 more new jobs than non-backed counterparts.

Paglia said the research suggests that private capital is a powerful stimulant for small- and mid-sized companies. The results also suggest that capital deployed in this segment is focused on value creation rather than financial engineering, a goal more frequently seen in larger buyout transactions.

Private capital fund managers also bring more to the table than just money, which could partially explain private capital's significant impact on smaller establishments, Harjoto said.

Such fund managers "also bring expertise to help owners address various growth challenges, and can help establish the kind of networks and relationships that allow these companies to move forward," he said.

In addition to performance, the researchers examined various demographic traits among the businesses that received private capital. The analysis found that both minority- and women-owned businesses are less likely to receive either private-equity or venture-capital financing.

Specifically, minority-owned businesses were 12.6 percent less likely to receive private equity and 34.7 percent less likely to receive venture capital, while women-owned businesses were 3.6 percent less likely to receive private equity and 22.5 percent less likely to obtain venture capital.

The study also shows that private equity funding tends to go to retail, transportation and machinery production companies, whereas venture capital tends more towards companies in business services, computers, computer chips and medical equipment.

Gary Kunkle, IEGC research fellow, said the study's results should encourage government agencies to promote the role of private-equity and venture-capital financing in the economy.

"In addition, if governments wish to increase social equity and spread the benefits of growth across a larger population," he said, "more effort should be made to extend private-equity and venture-capital financing into minority and women-owned businesses."

Chad Brooks is a Chicago-based freelance writer who has nearly 15 years experience in the media business. A graduate of Indiana University, he spent nearly a decade as a staff reporter for the Daily Herald in suburban Chicago, covering a wide array of topics including, local and state government, crime, the legal system and education. Following his years at the newspaper Chad worked in public relations, helping promote small businesses throughout the U.S. Follow him on Twitter.